UPDATE: USPS Denies 2nd Rate Case Is in the Works

The U.S. Postal Service is already planning another rate increase, even though the current rate case has not been finalized yet, according to mailers who attended this month's Mailers Technical Advisory Committee meeting in Washington. A postal official, however, denied the reports last week.

Though mailers did not say when the filing would take place or how much the rates would go up, they said postal officials are expecting a deficit in fiscal 2001, which ends next September. It would be rare for the USPS to experience a deficit in the same year it has a rate increase.

Meanwhile, the testimony phase of the current rate increase is complete, and the Postal Rate Commission is scheduled to present its recommendation to the USPS' Board of Governors on or about Nov. 10.

For direct marketers, the average increase would be 7.7 percent. The largest increase in this category -- 14 percent -- would be for some automation flats, or catalogs. Direct marketers continue to hope that the requested rates will be lowered, but postal management has been telling its customers to plan on a Jan. 7 implementation date.

A source at the PRC said the panel has received only the current case, "and we haven't been given any reason to expect a case within the next few months."

Richard Strasser, acting chief financial officer at the USPS, said it would be premature to start planning another rate case.

"We have to see the outcome of this rate case, and we have to see the outcome of the labor negotiations and arbitration, at which point we have to determine the situation as it is related to our cost," he said. The USPS will start thinking about another rate case "as we observe what's going on with our volume and our growth," he said. "This is a key first quarter."

One area where postal officials are expecting a downturn is single-piece First-Class letter mail, which accounts for nearly 60 percent of the agency's revenue.

"We are dealing with uncertain growth patterns," Strasser said. "First-Class mail is not growing as fast as forecast, so we have a very conservative forecast for next year's budget in terms of revenue growth. We will deal with our resource allocations as if there was no volume growth next year. We think that's the prudent way to manage this."

The USPS anticipates a growth rate of 1.4 percent for First-Class mail as opposed to its traditional 2 percent to 3 percent. This coincides with a General Accounting Office report last year saying First-Class mail volume will begin to decline in 2003 at a rate of 2.5 percent a year for the following five years.

Strasser did have some good news to offer: Based on the USPS' preliminary year-end fiscal 2000 financial numbers, the agency probably experienced a deficit of $100 million to $150 million. This is half the amount Postmaster General William J. Henderson was expecting earlier this summer. However, postal officials don't expect to release the complete numbers until the end of the year.

Given Strasser's gloomy forecast, some MTAC members said it sounds as if the agency may see as big a loss next year or bigger.

"It would be a miracle if they don't file next year," one insider said. "Figure anywhere from August on, they'll file."

The worst-case scenario would be if postal officials filed another rate case next summer, which means higher rates could be implemented 10 months after that. Another rate increase on top of that also could be filed in early 2002 and implemented in early 2003.

While no one knows for sure, MTAC members speculated that the size of the next rate increase would be 5 percent to 6 percent, only slightly higher than the rate of inflation. Some think the USPS' strategy is to have small rate increases every year so Congress will finally take a renewed interest in postal reform.

Others said the USPS is trying to punish mailers because they are trying to push back the agency's contingency allowance. The Direct Marketing Association, backed by 16 major companies and associations that rely on the postal service, submitted testimony to the PRC that the postal service should slash its proposed $3.4 billion revenue requirement to $1.8 billion. It argued that postal officials should cut the USPS' contingency allowance -- which accounts for $1.7 billion of the requirement and is included in the rate case to offset any unforeseen events -- to $175 million.

"This is partly revenge," said a mailer who asked not to be identified. "The USPS is saying that if you don't give us the money we want, then we'll just raise rates again."

The same mailer said the USPS has to look as if it is not doing well because it is negotiating with its labor unions, whose contracts all expire in late November.

Ultimately, MTAC members said, the rate case will be determined by the outcome of binding arbitration between the USPS and the unions. When union wages and benefits increase, they usually directly impact postal rate increases, because labor is 75 percent to 80 percent of postal costs.